Commodities Are Sizzling, Risks Are Building

Daniel Moser submits:
Practically all risk assets, and even many “risk-off” assets, have enjoyed extraordinary performance in the past month–maybe even too much. Jim Cramer, like him or not, coined the saying, “bulls make money; bears make money; pigs get slaughtered”. It would appear prudent to print out those words of wisdom and tape it to your computer screens for at least the next few weeks. A substantial portion of the gains in the last month seem most attributable to the prospects for additional quantitative easing. There has been some degree of improvement in some macro data, but at best, this is secondary in nature. David Tepper has been widely quoted for articulating two outcomes for asset prices in the near future: (1) macroeconomic fundamentals improve, at which point the Federal Reserve will not resort to quantitative easing, and asset prices generally go up albeit modestly or (2) macroeconomic fundamentals do not improve at which point the Federal Reserve will begin some sort of quantitative easing which can be characterized by “everything going up”. The whole point of quantitative easing is to stimulate economic activity via lowering market interest rates in an effort to induce risk-seeking behavior by consumers, entrepreneurs, and lenders. The benchmark results for a successful quantitative ease can probably be characterized by increasing demand pull inflation (e.g. inflation prompted by short-term demand outpacing supply). This is where critics of quantitative easing will argue that quantitative easing, or at least this time around, is resulting in little more than debasing the currency. In part, this argument is compelling because interest rates are so incredibly low that it is rather difficult to foresee any additional economic investment or risk-seeking behavior prompted from even lower interest rates. Moreover, with the recent outbreak of the foreclosure fraud issues; decreasing mortgage rates even further seems somewhat analogous to shooting an elephant in the ass with a bb gun–it isn’t likely to make much of a difference given all the other issues playing out. Nonetheless, a tremendous amount of risky assets have performed well on the prospects for an additional round or some systematic quantitative easing. Is the market in a reflexive process right now? Since the purpose of quantitative easing is to lower interest rates and push up asset prices, and the market has done just that, what’s the point for the Federal Reserve to actually deliver quantitative easing? It would seem to me there isn’t a point to it. Furthermore, the market front running actually alleviates the need for the Federal Reserve to purchase assets–they have a significant portion of the outcome that was desired (in terms of asset price shifts) and they haven’t had to spend a dime to get it. This sounds pretty reflexive to me. But now we are in a scenario where if the Federal Reserve doesn’t deliver or doesn’t deliver to the extent market participants expect, asset prices could fall in the near term, which is to say the market might just be priced for a perfection that won’t be delivered. One specific example of a possible market distortion is oil prices. Neil Beveridge, PhD, of Bernstein has recently argued that, “with oil having increased to $82/bbl over the past two weeks, it would seem that momentum rather than fundamentals is driving price.” He goes on to argue that, “despite the increase in oil prices, US petroleum stocks are at record levels relative to historic norms. Demand growth in developed markets remains weak with high unemployment doing little to stimulate new demand. Global supply has held up relatively well this year despite the reduction in global upstream capex investment in 2009. Latest estimates suggest that global non-OPEC production is likely to grow by over 2% or (0.9mbls/d) this year. There is no fundamental problem with oil supply, and current markets remained well-supplied with crude in our view. On this basis there would seem little justification for oil prices trading significantly above the marginal cost of oil which we estimate to be around $75/bbl.”Complete Story »

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By Bret Jensen:The quote "Bulls make money, bears make money, pigs get slaughtered" is most associated these days to the Mad Maestro of Mad Money, Jim Cramer. However it is actually an old Wall Street saying that counsels against excessive greed and impatience. I think the saying is pertinent here in the last month of the trading year. It definitely should be paid heed to for those investors who have racked up huge gains in some of the high P/E stocks whose stock prices have gotten ahead of their valuations.

WASHINGTON — Federal Reserve Chairman Ben Bernanke strongly defended the U.S. central bank’s bond-buying stimulus before Congress on Tuesday, saying its benefits clearly exceed possible costs.
The Fed chairman also urged lawmakers to avoid sharp spending cuts set to go into effect on Friday, which he warned could combine with earlier tax increases to create a “significant headwind” for the economic recovery.

By Erick McKitterick:CNBC's Jim Cramer is famous for many quotes, one of which is: "bulls make money, bears make money, and hogs get slaughtered." In past years, I would mostly agree with him, but recently, being a bear in this market appears to be a dying breed. 2013 has had an incredible start, posting seven consecutive weekly closing gains. The S&P closed last week up 0.1 percent to 1519.79, pulling off a slight gain for the week.

Bulls make money; Bears make money; but Pigs get slaughtered - in massive amounts in China compared to the rest of the world... and unlike Ben Bernanke's apparent life-long vendetta against bears and their deflationary threat, this post actually means real pigs...

It’s now conventional wisdom that the housing market — once the anchor that sank the American economy — is the ballast that’s keeping it afloat, however tenuously. The Case-Schiller index of home prices, released last week, showed a sixth straight month of year-over-year increases. Rising home prices buttress consumer demand as home prices are the single biggest source of the average consumer’s wealth.

Dr. Stephen Leeb submits:Economic statistics continue to disappoint investors. Consumer spending, consumer confidence, housing, industrial production (in China and Europe as well as the U.S.), are all less than expected. Okay, China is a bit of a special case since, being in no danger of recession, it welcomes rather than fears a slowdown in its torrid growth. For the U.S., however, any additional slowdown could have painful consequences. Let's consider the context. U.S.

Matthew Bradbard submits: Bulls make money in bull markets and bears make money in bear markets BUT pigs get slaughtered. Most have heard this saying, but are you applying this to your trading? We saw a lower high and lower low in Crude as prices traded lower again today, making it 8 out of the last 9 sessions. Though we have not advised clients to get short, we do expect a trade down to $72/73 in June.

Stanford Professor John Taylor has suggested that monetary policy could be summarized in terms of a simple rule, lowering interest rates when output is too low and raising them when inflation is too high. A number of academic papers have investigated this rule from the perspective of describing what the Federal Reserve has historically done.